Joe knows apartment buildings.
Joe knows rehab.
Joe knows management.
Joe knows security systems.
Joe even knows refinancing.
How on earth did Joe Welsh, landlord, figure all this stuff out? He must have had years of experience in the real estate field before he bought his first building, right? An MBA in management, no? And he probably read a library`s worth of books on the rigors of landlording and attended a half-dozen ”Get Rich in Real Estate” seminars in strategic preparation for buying an income property, correct?
Or maybe it`s because Joe, like Bo and that athletic shoe company he pitches for, has a simple, three-word philosophy: Just do it.
”You don`t have to think about it, you don`t have to plan ahead much, you don`t even need much money. Just find yourself a nice two-flat with a basement apartment and buy it. It`s that simple,” says Joe, who owns or co-owns six buildings on Chicago`s North Side. ”Just do it.”
But wait a minute, Joe. What about all those tenants from hell who don`t pay rent on time? And the nightmare mechanical breakdowns in mid-winter? Joe, what about pets?
”Just do it,” he says. Hmmm, maybe there`s a pattern beginning to develop here.
Easy does it
So you think you might want to be a landlord? To be sure, not everyone has a Joe Welsh streak in them, but Welsh`s background as a by-the-book Chicago cop, recently retired at age 50, might explain why he says that being a landlord ”isn`t as tough as it`s cracked up to be.”
Welsh bought his first building, an Uptown six-flat ”with plastic tile and layers of wallpaper everywhere,” in 1975. Having patrolled the neighborhood for almost a decade at that point, Welsh was intimately familiar with Uptown`s crime problem, but found the housing stock to be very workable. ”You`ve got oversized lots, real livable apartments with closets in each bedroom and real decent buildings built in a way that you can work with them,” he says.
”If you go down to Old Town, the rooms are small, a lot of the bedrooms don`t have closets and, with the 10-foot ceilings some of them have, the rooms look even smaller,” he says. If you want to do any rehab there, you`ve got to move walls and that gets into more money.”
Instead, he turned to Uptown and Albany Park, bought one building outright and teamed with partners on five other buildings, saying, ”(If) it`s a great deal, then 25 percent or 50 percent of a great deal is better than zero percent.”
Hey, partner
In choosing partners, Welsh paired, on different occasions, with two police officers he was working with on the streets. While most prospective property partners could never match the ”do or die or doughnuts” attitude of cop partners, Welsh offers this advice for finding a real estate partner:
”You`ve got to think alike and have an understanding before you start of what your ultimate goals for the property are,” he says. ”Someone who wants to come in and get rich in a hurry and flip the building-he`s going to be my partner.”
Another area the ex-cop sunk some money into was individual and common area burglar alarms, which run about $12 per unit per month for monitoring costs. ”We get a certificate from the alarm installer, I give it to my insurance company and they give me a big enough rebate that it just about pays my costs,” he says.
”People looking back say, `Gee, what a smart move. How did you ever figure out that Uptown was gonna get lucky and you were gonna make money?` And I say, `Dumb luck. I couldn`t afford anything else.` ”
It wasn`t luck, though, says Welsh, that he joined the Edgewater Uptown Builders` Association, which has helped soften some of the blows in the real- life real estate school of hard knocks. The association sponsors speakers, new product presentations and educational programs designed ”to help the little guys get along,” he says.
”The idea of all these real estate books and get-rich stories on TV-they have great theory in them,” Welsh says. ”But a lot of the people took the courses and bought the books, and what percentage of them did it? Doing it is different.”
Peter Holsten was one of those guys who bought the book and did it anyway. Now president of his own Oakwood Development Co., which manages more than 500 units in Albany Park, Uptown, Edgewater and Rogers Park, Holsten was lured into real estate while attending grad school at the University of Chicago by a classmate who bragged that he was putting himself through school on income from an apartment building.
”He told me that all I had to do was buy one of those books like `How to Make a Zillion Dollars Overnight in Real Estate,` and I took him seriously. I picked one up, read it and ran out and bought a 16-unit apartment building in Albany Park,” Holsten laughs. Immediately after buying the building, the narrative began to vary from what he`d read in the book.
”I put down my life savings as a down payment, then I didn`t have any money to fix up the building,” he says. ”And it turned out the guy who sold it to me was kind of a shyster. After we closed, half the people moved out. He had a bunch of people living there to make it look like it was full.”
Saving grace
Going into his first winter with a half-vacant building and no money to fix it up, Holsten closed the book and, with the help of a consultant, went on a conservation crusade, which quickly cut 40 percent of his energy costs.
”Energy repairs are among the few building improvements you can do that pay for themselves. You can do the repairs and not go out of pocket,” he says.
The first, according to Holsten, is that every degree you set the thermostat back over an eight-hour period saves you 1 percent of your gas bill. ”If you`ve got a $10,000 annual gas bill, setting the heat back five degrees for eight hours each night saves you $500. If a thermostat only costs $100 installed, you`ve got a real quick payback,” he says.
Storm windows, on the other hand, can save as much as 10 percent of energy costs, says Holsten, but the $1,000 savings on a 16-flat like his would have been offset by $5,000 in installation costs. ”Do the items with the quickest payback in the order in which they would pay back,” he advises, adding that prospective income property owners shouldn`t liquidate themselves buying a building. ”Start small with a two- or three-flat,” he says, ”and don`t quit your day job.”
A skeptical eye
Right now, lenders are taking a long look at first-time buyers of buildings with five or more units, according to Michelle Browne, a real estate agent with North Properties Brokerage. ”They`re really looking to see if
(buyers) have any experience managing an income property,” says Browne, who advises prospective income property owners to ”buy value. Go for as much square footage for your dollar as possible and look for a building with few units that produce more money. That way, you`ll have fewer tenants to deal with and those types of buildings generally appreciate faster.”
Browne also advises that you take another important factor into account when income property shopping: your sanity. ”Most agents have had people who`ve bought income properties and found out they were excellent financial investments, but very poor emotional investments,” she says. ”Buy something that won`t make your life miserable. Look at the tenancy and make sure they`re the kind of people you can live with.”
You`ll also have to decide whether you want to live in the building. Some first-time landlords prefer to buy a property and rent all the space so they get 100 percent of the tax breaks. Others, like Holsten, disagree. ”You get a property tax break by living in it and there`s something about being in the building and not feeling the heat go on or have it go on too early or too often or too late. It`s stuff like that that teaches you how to manage these things,” says Holsten.
And living in the building provides valuable lessons in finding out things about tenants that don`t show up in the credit check, he says.
”Hearing water running and dicovering that someone upstairs is constantly overflowing their bathtub or seeing smoke come out of the apartment and finding that someone has fallen asleep while they were frying their food teaches you a lot about being a landlord. It`s one of those things that no matter how much you screen tenants you don`t find out about until you spend time in the building,” says Holsten, who saves his best, and simplest, advice for last.
”Talk to someone who`s already doing it,” he says. ”The problem with reading books is that the guy wrote the book to sell the book. They never told me about fires, or the boiler shutting down at 3 o`clock in the morning on a 10-degree-below night or all the sneaky ways tenants use not to pay rent.
”I guess those books can give you a good starting point, but before you put dime one into a property, I would talk to someone who`s doing it to supplement the roses painted in the books.”
